Indonesia: A worrying wave hits hard

The Indonesian government has introduced more stringent measures to tackle the resurgence of Covid-19 cases amid the spread of the delta variant and low vaccination rate.

  • The Indonesian government has introduced more stringent measures (emergency PPKM) to tackle the resurgence of Covid-19 cases amid the spread of the delta variant and low vaccination rate.
  • Our 2021 GDP growth forecast has been reduced to 3.2% from 3.5%, and suggests economic output is unlikely to recover to pre-pandemic levels until Q4 2021.
  • We have also increased our fiscal deficit forecast for 2021, and expect higher fiscal spending to be funded by more bond issuance in the second half of the year.

Due to the resurgence of Covid-19 cases in Indonesia, the government introduced measures (emergency PPKM) in early July that are more stringent than the mobility restrictions in place since last year. We expect the PPKM measures to be in place for 1-2 months, with only a very gradual reopening thereafter. The quick-spreading delta variant of the virus, the delay in implementing the PPKM, and the slow pace of vaccination with only 11.6% of the population inoculated by late July, point to an outbreak that is becoming increasingly difficult to contain.

Due to this severe second wave in Indonesia, we have reduced our 2021 GDP growth forecast for the economy from 3.5% to 3.2%. That implies economic output will not return to pre-pandemic levels until the fourth quarter of 2021, delayed from our previous third quarter estimate. The key sectors posing a drag on headline GDP growth are retail trade, accommodation and food, as malls are closed and travel restrictions remain in place.

Unfortunately, Indonesia’s death rate per million of population has exceeded neighboring Malaysia’s, and is significantly higher than India’s at the worst point in its latest wave. With the rising death toll, the public fear factor will also weigh heavily on consumer sentiment for a prolonged period.

We have also raised our 2021 fiscal deficit forecast to 6.5% of GDP from 6.3%, above the Ministry of Finance’s budget of 5.7%. The budget will be the government’s main tool for providing support measures to vulnerable sectors and helping the broader economy, requiring higher fiscal spending on top of already existing measures such as cash transfers to millions of households.

A wider fiscal deficit will likely be funded by more bond issuance in the second half of 2021 and require support from Bank Indonesia (BI). BI is expected to leave its policy rate unchanged this year due to its priority of maintaining FX stability, but fiscal financing pressures create a policy dilemma for BI amid US Fed tapering prospects.

For more on our forecasts for the Indonesian economy, read our full report.

Contributor

    Euben Paracuelles

    Euben Paracuelles

    Southeast Asia Economist

    Rangga Cipta

    Rangga Cipta

    Southeast Asia Economist

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